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The annual fee charged by a fund to cover management, administrative, and operating costs, expressed as a percentage of average assets under management.
Expense ratios directly reduce your returns. A fund with a 1% expense ratio that earns 8% gross delivers only 7% to investors. Over 30 years, the difference between a 0.03% expense ratio (like Vanguard's S&P 500 ETF) and a 1% ratio on a $100,000 investment is over $150,000 in lost wealth. Index funds typically charge 0.03-0.20%, while actively managed funds charge 0.50-1.50% or more. Expense ratios are the single most reliable predictor of future fund performance, with lower-cost funds consistently outperforming higher-cost ones on average.